With Tax Season Looming, Appellate Division Refuses to Find Duty to Defend Against IRS Action


In William B. Kessler Memorial Hosp., Inc. v. North River Ins. Co., 2013 WL 6036678 (N.J. Super. Nov. 15, 2013), the Superior Court of New Jersey, Appellate Division, rejected the notion that an insurer’s promise to “defend any Claim” included a duty to defend against an Internal Revenue Service (“IRS”) action seeking taxes and penalties where taxes and penalties were excluded by the policy.

Defendant North River Insurance Company (“North River”) issued a one-year claims-made “Platinum Management Protection” liability insurance policy to plaintiffs William B. Kessler Memorial Hospital, Inc. and Foundation of William B. Kessler Memorial Hospital.  Nine trustees of the Kessler entities were “Insured Persons” under the policy, and plaintiffs in the action against North River.

Beginning in 2009, the IRS sought to collect unpaid section 941 employment taxes from plaintiffs.  Plaintiffs requested that North River defend and indemnify them pursuant to the policy.  North River denied coverage because the IRS action sought taxes and penalties, which were excluded under the policy.  Plaintiffs initiated a declaratory judgment action, claiming North River owed a defense even if taxes and penalties were excluded under the policy because the IRS action fell within the definition of “Insured Person Claim” and North River agreed to “defend any Claim.”

The Court ruled that plaintiffs’ potential exposure to the IRS’s “effort to impose responsibility for section 941 liabilities is undoubtedly either a tax or a penalty” and, therefore, excluded under the policy.  Id. at *3.  The Court rejected plaintiffs’ argument that the “General Conditions” section of the policy created an independent duty to defend against an “Insured Person Claim” regardless of whether the loss was contemplated by the policy.  The Court ruled that plaintiffs’ “universal-right-to-a-defense contention” failed because it “fundamentally change[d] the nature of the policy that was purchased” by transforming the policy “into a contract for unlimited legal services.”  Accordingly, the Court maintained that, “[w]hen a claim is one that ‘even if successful, would not be within the policy coverage,’ there is no duty to defend.”  Id. at *4 citing Danek v. Hommer, 28 N.J. Super. 68, 77 (App. Div. 1953), aff’d, o.b., 15 N.J. 573 (1954).


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